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Annuities

5 key questions on annuity income riders

Stan "The Annuity Man" Haithcock is an annuity specialist and nationally
recognized annuity critic. Haithcock is the author of six published books on
annuities, including the highly acclaimed “The Annuity Stanifesto.” With over 25
years of experience in the financial-services industry, he has propelled his
“will do, not might do” contractual-guarantees-only mantra to reframe the
annuity category for the transfer-of-risk strategies they were designed to be.
Haithcock is the co-founder of the first direct-to-consumer annuity platform,
annuities.direct. Haithcock is licensed
in all 50 states and is based in Ponte Vedra Beach, Florida. You can learn more
at
stantheannuityman.com.

In a little more than 10 years, income riders have taken the annuity world by storm. There are several key questions to ask before adding this benefit to your deferred annuity.

By definition, an annuity income rider is an attached benefit to a deferred annuity policy that solves for longevity risk by providing a lifetime income stream. Income riders typically have a guaranteed growth rate that can be used for income, and can be flexible from a planning standpoint. The bottom line is that these riders can be confusing, expensive, and should only be considered for income-later planning.

If you draw a line down the middle of a blank sheet of paper, the left hand side would represent the investment side of a deferred annuity. This is typically the separate accounts (aka mutual funds) with a variable annuity or the index option strategy with an indexed annuity. For the record, I don't care about this side because the choices are limited and you should own an annuity for the contractual guarantees only.

On the right hand side of the ledger is the income rider benefit that is a transfer of risk to the annuity company to pay you a lifetime income stream that starts at your discretion. This amount can only be used for income, and cannot be accessed lump sum. With a few riders your beneficiaries can use this amount as a death benefit, but for this discussion, let's look at this benefit from an income standpoint. Just to confuse things more, income riders vary from carrier to carrier, and product to product. Below are the main questions you need to ask concerning income riders.

1. What is the roll-up rate?

This is the guaranteed rate that the right hand or guaranteed side of the ledger grows by as long as you are deferring. As soon as you turn on the lifetime income stream, the rate stops. This roll-up rate can be either compound interest or simple interest, and some annuities offer upfront bonuses that can be applied to the income rider side as well. Just because a roll-up rate is high doesn't mean that the income payout will be greater than a lower roll-up rate.

2. How long is roll-up rate guarantee period?

Some income riders guarantee the roll-up rate for a specific period of time, but can change the rate after that. For example, an income rider could guarantee a 6% annual rate for the first nine years of deferral, but then the guarantee can renew at different rate that cannot go lower than 3%.

Some riders have a guaranteed rate for the life of the contract or to a certain age, and once the policy is issued the terms don't change. For example, one carrier offers a 6% simple interest income rider that allows you to defer until income is turned on, or up to age 95.

Some income riders restrict when the income can start. For example, you can be required to defer for as short as two years and as long as 10 years before you can turn on your income stream. There can also be limitations on when during the year that you can turn the income stream on. Some require you to wait until the contract anniversary date, while others have no restrictions. This is very important to know, and could really cost you if the rules aren't followed.

3. What is the actuarial payout?

This is a very important part of the income rider payout calculation. The actuarial payout is the percentage that is applied to the income rider total dollar amount that determines your lifetime income stream. For example, if your income rider value has grown to $200,000, and the actuarial percentage is 6 when you turn on the income, then you will receive $12,000 a year for the rest of your life. All annuity lifetime income payments are based on your life expectancy at the time you decide to receive payments. The actuarial rate is often more important than the roll up rate in determining the highest contractual payout.

4. What are the fees?

Most riders have a guaranteed roll-up rate for a specific period of time and at certain contractual fee. For example, a 6.5% income rider rate can be guaranteed for 10 years of deferral for a fee of 0.95% per year. It's important to know that the rider fee is taken out of the accumulation value (investment side), not the rider side.

Some riders will then offer an option to renew or restart if you want to continue to delay turning on the income stream. For example, a 6.25% income rider with a guaranteed annual rate for 10 years of deferral at 0.95% annual fee, might have an option to renew for another 10 years of deferral at 6.25% with the fee not to go above 1.25%. It's important to know these details because your agent might not be reachable in 10 years, and the home office might not effectively remind you. If you don't tell the annuity company that you want to renew or restart the income rider, it won't happen automatically. Also, there are a few income riders that actually grow at a smaller rate like 4.5% during the deferrals years, and charge no fee at all.

5. What are the carrier ratings?

Annuity guarantees, including income riders, are only as good as the company backing them up. It's also important to know that the state guarantee funds that protect policies to a specific level, don't cover income rider valuations. That coverage only guarantees, to a specific dollar amount, the accumulation or investment side of the calculation. You can visit to nolhga.com to see your state's specific limits.

Income riders are actually called "living benefits" in the annuity world, and there are many income rider choices out there. All have different rules, guarantees, and functions, so take your time and learn all the facts when deciding which income rider is right for you.

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